Business angels are the most important source of informal capital for entrepreneurial firms. But if you are a first time founder you probably have little or no network to business angels and do not know what you are looking for. So where do you start? Well, let´s start easy by understanding some characteristics and motivations.
Smart capital is no myth
If someone asked me I a definition about business angels would tell him or her that they are high-net-worth individuals who typically invest in small private firms on their own account. They provide small and medium-sized enterprises with with “smart capital”. First, they provide the entrepreneurs with the necessary initial capital requirements. Second, they offer their knowledge, business skills and network to the young company. They do so by actively following the company’s strategy and decision-making process and even sometimes by obtaining a board seat. This largely stems from the fact that business angels often have managerial and entrepreneurial backgrounds and want to be in an active role.
Return is not the most dominant investment reason
Taking an active part in a company’s story is one of the key characteristics of business angels. I am certain that every investor wants to receive a good deal and is interested in high returns, but angels invest in companies not only for the financial returns. Sure some have a purely economic investing approach, but hedonistic and altruistic investors are more common than you think. The economic investor would focus on the highest ROI expectations and perceived risk, whereas hedonistic investors focus on enjoyment aspects of investing and do not have high ROI expectations.
Finally, altruistic investors see their investing as supporting new businesses and socially benefitting the community. A study of the French angel association found that the feeling of adding value to a company and adventure/fun clearly outweigh the motivation of generating a profit. The study identified „Feeling of value added (34,5%)” as most important factor followed by “adventure/fun” (27%), “helping to start a new enterprises” (12,7%), “contribution to local economic development” (10,5%), “profit” (7,8%), “other reasons” (5,6%), and “finding an entrepreneurial working place for himself” (1,9%). Take a moment to think about this. From an entrepreneurs perspective you might not have to offer the best financial deal, but the possibility to contribute and have a more active part in your company.
95% of all business angels are male
So who are these individuals investing smart capital into young companies? Business angels are dominantly male. In the US 95% of all business angels are male, in the U.K. 99% and in Germany 97%. On average they are between 40 to 65 years old. Typically, business angels have gained a university diploma or professional qualifications. The American Securities and Exchange Commission defines a business angel as a natural person whose net worth excesses $1 million, generates income exceeding $300,000 or a joint income with a spouse of at least $300,000 in each of the two most recent years. In the USA one-third of the angels has a net worth of at least one million dollars and in Great Britain around 19%. Interestingly, around 25% of all angels have financial backgrounds. So if you were looking for a date on an online platform put your settings to a 40-65 year old male with a university diploma that works in finance or has an entrepreneurial/managerial background. Obviously there are always exceptions to the rule, but this will be the average kind of person you are dealing with.
You should be looking for $10,000 to $250,000 in cash
There is no exact number to start looking for. Your business and financial planning should be the indicator for this. Studies show that a minimum of £10,000 per deal is invested in the U.K. and typically less than £100,000. In the US, the majority of angel investments ranges from $50,000 to $150,000 with a median of $75,000, but can go up to $250.000. Also, due to time involvement, legal costs and other factors be prepared to give up a sizeable part of the business. There is a reason that most venture capital funds take more than 10% of a companies share. The same holds for business angels.
Angels have limited resources for due diligence
You know by now that business angels are private individuals that invest their own money, so they take personal financial responsibility. Consequently, one should assume that they conduct in-depth due diligence and are experienced investors, but they cannot conduct the same due diligence as professional funds do. The high legal costs or due diligence for technological assessment would not be justified by the small investment amounts. Further, founders often think that the majority of deals is done by well-known business angels or so called super angels. In reality however, the average angel invests 2-5 times over his lifetime and does a deal every 18-24 months. Accordingly, they usually have little investment experience and limited investment capacity compared to venture capital firms. Two exceptions are super angels (more than 5 investments) or angel syndicates (a group of angels sharing deal flow, resources, network, costs, etc.).
Business angels invest close to their location or in industries they know
Now when it comes to business angels’ strategies or in other words how angels select companies, there are some common factors as market size, team, product, etc. Nonetheless, two factor, which you cannot change about your business should be on your list. First, they invest in industries they know or have personal experience in. Second, they focus on businesses close to their location. So, talk to angels that have background in your industry or are close by. Remember that angels want to take an active part of your company and your journey. Face-to-face meetings are essential.
Angels increase firm performance and overcome funding gaps
96% of businesses fail within 10 years, most of them in the first months and years. Almost all scientific studies in the field of angel investing find that angel investments increase firm performance and the likelihood to survive. In the first part of this article we discussed the benefits that angels provide to a company. In detail, the benefits focus on four key areas of a business:
- Sounding board/strategic,
- Supervision and monitoring,
- Resource acquisition,
- Mentoring role.
The most dominant impact in terms of measurable support of an angel is shown to be resource acquisition. There is significant evidence that angels overcome funding gaps. The key learning from an entrepreneur’s perspective is that you should leverage your angel´s network when looking for follow-up funding. Always.
Send a two to three page summary of your business plan or a pitch deck
Now it is time to get in touch, but where and how you wonder? Most angels prefer to read a two to three-page summary business plan and than get personal face-to-face meeting. The goal is to find out whether they like the entrepreneur in the first meeting. The majority of business angel investments are based on trust in the entrepreneur or trustful advisors in their network. One could even argue that deals are purely relationship-driven.
8 places to get in touch with business angels
Angels source the deals through loose referral of other entrepreneurs, venture capital clubs, angel alliances, offline matching networks and Internet matching networks. These are all places where you can tap in as entrepreneur to get into personal touch with investors. Also, open pitch sessions coordinated by incubators or accelerators attract lots of angel folks. In Berlin for example hub:raum organizes open pitch sessions. Further, co-working spaces offer connections to business angels. In Cologne there is an open business angel hour (rotary business angels network). Finally, the German Business Angel Network (BAND) offers several events I would recommend: German Business Angels Day, BAND Business Angels Community Summit, “Business Angel des Jahres”, and Business Angels Decade. For more info check their website. https://www.business-angels.de/
Still no idea where to start?
Here are some pages of contacts to business angels in Germany
Looking for more insights and events in Austria, Belgium, France, Italy, Netherlands, Portugal, Scotland or the U.K.: Have a look here. https://www.business-angels.de/wp-content/uploads/2015/12/BAE-The-European-Business-Angel-Market.pdf
Considering cold mailing an angel investor? https://medium.com/chausson-finance/how-to-get-a-meeting-with-a-business-angel-bc372ea36e81
More questions? Drop me message. www.andreasjansen.com
Let me know what you think…